2013-03-17 – London
Global currency markets have recently seen many of the G20 nations embark on a so-called currency war with quantitative easing leading to currency devaluation across the board. This has seen competitive devaluation across most major currencies, coinciding with aggressive austerity measures in some economies.
In sharp contrast to this, Bank of England (BoE) governor, Sir Mervyn King, has recently intervened, saying Sterling has now devalued far enough, and suggested Sterling is now nearing its proper value.
This could be the first indication that the battle wearied pound may finally be levelling out. Some economists and business leaders fear that any further devaluation of the currency could mean further increases to inflation. Higher inflation would mean further pressure on household budgets and could threaten UK economic growth further.
With this latest move, the focus is now set on ensuring a sustained economic recovery.
However, there are indications that the Chancellor, George Osborne, may provide incoming Bank of England governor, Mark Carney, with more powers for ‘monetary activism’ in his upcoming Budget this week. The monetary policy committee may be given more time to keep inflation within a 1 percentage point range of its current target of 2 percent.
Such a move will give the BoE a dual mandate, similar to that of the Federal Reserve, to target employment alongside inflation. It may even be given a new target to ensure cash spending in the economy grows, with less emphasis on the level of inflation.
The shift in the mandate given to the BoE is in contrast to calls from Vince Cable, business secretary, to promote growth by relaxing current austerity measures, referred to as ‘Plan A plus’.
All of this indicates that the current shift to slow Sterling’s decline may be short-lived.
